Indian bond yields rise

Indian federal bond yields rose on Friday as investors trimmed positions after underwriters were forced to buy some bonds at a debt sale, a decision by the central bank that was likely made to avoid a further rise in government borrowing costs.
The most-traded 10-year bond yield closed at 8.83 percent, 2 basis points above its close on Thursday after moving in a 8.78 to 8.85 percent band during the day. The yield had dropped 7 basis points at close on Thursday and had fallen as much as 11 bps intra-day. Total volume on the central bank's electronic trading platform was nearly half the average at 49.75 billion rupees ($970 million).
"The devolvement at today's auction was quite unexpected and shows that the underlying real buying interest for bonds is very low," said Bekxy Kuriakose, head of fixed income at L&T Investment Management. "There is a government bond redemption due soon as also the open market operation next week, so hopefully things should get better," she added.
On November 24, 116.33 billion rupees will be entering the banking system due to the redemption of the 11.50 percent 2011 bon d. Traders had expected the bond sale to be fully subscribed and predicted good demand at the sale due to comfort from the central bank's move to buy back bonds and the raising of foreign investor limit in government debt.
India on Friday sold 130 billion rupees of bonds but primary dealers had to buy a part of it, the Reserve Bank of India said in a statement. "The devolvement is quite unbelievable, had not expected this. This clearly seems like a yield signal from the central bank. RBI has to keep buying back bonds to keep the market comfortable," a senior dealer with a primary dealership said.
The cut-off yield on the 10-year paper, which was part of the sale, was set at 8.83 percent, above market expectations of 8.82 percent. "Further direction for bonds depends on whether the government announces more cash management bills and state loans and if the central bank decides to conduct more OMOs," said Debendra Dash, a fixed income dealer with Development Credit Bank.
"I broadly expect an 8.80 to 8.90 percent band on the 10-year paper," he added. After market closed, the central bank said 11 states would raise 58.60 billion rupees via sale of 10-year state development loans on November 222. The benchmark five-year swap closed up 2 bps at 7.27 percent, while the one-year rate ended 2 bps lower at 8.06 percent. The Reserve Bank of India had said late on Wednesday it would conduct open market operations (OMO) on November 24 for the buyback. Details of the papers are awaited. The government also raised the ceiling on foreign institutional investment in government and corporate bonds by $5 billion each to help boost foreign inflows after the existing limits were almost reached.
Traders said the news had been priced into market yields and the choice of papers at the buyback would now be key. They would continue to watch the euro and regional equity markets for gauging cues on the evolving macro-economic situation globally. The euro rose on Friday as pressure on Spanish and Italian bonds eased after the European Central Bank stepped in to stabilise the market, but fears both countries' borrowing costs are at unsustainable levels sent European stocks to new five-week lows.